World Demand for Oil Will Contract In the Third Quarter

Bhushan Bahree / Wall Street Journal 16jul01

PARIS -- The International Energy Agency now reckons that world demand for oil will contract slightly in the third quarter this year, yet another worrying sign of the world's economic malaise. A pickup in demand after that, other than for seasonal reasons, is dependent on a turnaround in the U.S. economy heralded for late this year, the Western group said.

In its latest monthly report released Friday, the IEA, which coordinates energy policies among industrialized nations, drastically lowered its oil-demand forecasts for this year. It now expects the average growth in oil demand this year to be just 460,000 barrels a day, down sharply from the 1.9 million barrels a day it had initially expected last summer. For the third quarter, the IEA reduced its demand estimates by 700,000 barrels a day to 75.9 million barrels a day. That's down from the 76.1 million barrels a day of oil the world used in the third quarter of 2000.

As an indicator of global economic activity, oil demand's dip into negative territory could be seen as a dire economic sign. But some analysts see a more complicated picture of the New Economy, saying the drop in oil demand reflects a sharp slowdown in industrial activity, even as growth in the overall economy shows a much gentler deceleration.

"Industrial production is falling much faster than GDP," said Lawrence Goldstein, president of the New York-based Petroleum Industry Research Foundation, an industry think tank. "If you're not producing the goods, you can't be carrying them on the road," he said, explaining the weak demand for refined oil products.

Mr. Goldstein cited a group of eminent economists in the U.S. who between April and now have lowered their forecasts for world GDP growth by only 0.2 percentage point even as they slashed industrial-output growth expectations by 10 points.

Some oil analysts figure that the Organization of Petroleum Exporting Countries may have no one but itself to blame for the slowing demand for crude oil, which sustains the economies of its members. That's because it has kept oil prices relatively high at around $25 (29.28 euros) a barrel even as the world economy stumbled. Many economists figure that the increase in oil prices last year may have had a negative impact of no more than 0.5 point on world economic growth. But it was the proverbial straw that broke the camel's back.

OPEC disagrees, and its key members have made clear -- as recently as at a ministerial meeting in Vienna early this month -- that they are prepared to reduce their crude output to keep prices at current levels.

Some industry analysts say OPEC won't need to reduce its output because the IEA is mistaken. "They're being too pessimistic," said Roger Diwan, a managing director at Petroleum Finance Co., an industry consulting group in Washington, who figures that OPEC needs to keep its oil production steady. He says that while the IEA's demand forecasts are too low, the organization's expectations of increased supply from non-OPEC oil producers are too high. That's why the need for OPEC oil may not change much.

Despite high prices and increased investment, Petroleum Finance says non-OPEC production may show no overall growth this year, instead of the 600,000 barrel-a-day increase expected by the IEA. The only consistent increase in output outside OPEC so far has been in Russia, where spending on mature fields has resulted in increased output of some 300,000 barrels a day this year. A similar increase in Russian output is expected for next year.

But output increases in Russia and elsewhere are expected to be offset by declines in such countries as Argentina, Colombia and Egypt next year. Production in the North Sea, one of the world's big producing areas, is expected to be flat.